AKD Quotidian about — Cotton Update: June 2013

According to AKD Securities key takeaways from the report were downward revision in import expectations from China by I mn bales due to lower world exportable supplies and the downward revision of production estimates by 657k bales. Furthermore, recent currency movements for regional countries may result in Pakistan losing its competitive edge vis-a-vis currency depreciation as compared to the US$.

While CYTD PkR depreciation puts Pakistani exporters in a better position as compared to their Bangladeshi counterparts, however, WoW depreciation of 1.7% for the INR, 3.1% for the BDT and 0% for PkR presents a nascent worrying picture for Pakistani textile exporters. Finally, according to US Commodity Futures Trading Commission (CFTC), hedge funds and other large speculators decreased net long positions in cotton futures by 101 contracts while commercial users of cotton increased net short positions by 4,005 contracts. As result, cotton prices may be in for a correction given the sharp rally in the last two weeks.

Key takeaways: USDA released its monthly cotton report on Wednesday, Jun 1213. Key takeaways from the report were an upward revision for imports by China for the marketing year 2012-13 (Marketing Year (MY): August 1st to July 31st) by 1.75mn bales to 2Omn bales, while going forward USDA has slashed its import expectations from China by 1 mn bales to 11 mn due to lower world exportable supplies.

Export for the US, Australia, India and Turkmenistan have been revised upwards by 350k bales, 500k bales, 200k bales and 150k bales respectively for MY13. Production estimates have been revised downwards by 657k bales to 117.l6mn bales, mainly caused by a downward revision in production estimates for the US by 500k bales due to a prolonged brought in Texas, the main cotton growing state in the US. The USDA report reported lower imports in China for MY14F based on the continued Chinese cotton support price policy.

This is expected to result in increased demand for cotton in regional countries as China increases demand for imported yarn rather than cotton. The mix of higher expected demand and tighter forecasted supplies resulted in upwards pressure on cotton prices in the last two weeks.

Relatively strong PkR to hurt competitiveness? There has been sharp depreciation in regional currencies recently. In this regard, the INR has depreciated by 1 7%WoW while the BDT has fallen by a considerable 3.1 %WoW against the US$, which will help Indian and Bangladeshi textile exporters to undercut Pakistani textile exporters ceteris paribus.

Speculators trimming long positions: According to US Commodity Futures Trading Commission (CFTC) commitment of traders report, hedge funds and other large speculators have decreased net long positions in cotton futures by 101 contracts to 48,661 contracts while commercial users of cotton increased net short positions by 4,005 contracts bringing the total to 56,178 contracts on the ICE Futures US.

The recent movement in futures positions suggests that speculators are expecting the futures prices to go down. Cotton (COTLOOK A) prices have rallied strongly in Jun13, rising by 9%MTD to US$96.4/Ib, where the rally has been spurred by recent downward revisions in cotton crop estimates, overriding concerns over a slowdown in China. However, cotton prices may be in for a correction given the sharp rally in the last two weeks.